Download Class 4 Sales Forecasting, Protocol, and Voice of the Customer PPT

Innovation Management, GSB 2013
Stefan Wuyts
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1.
2.
Forecasting
◦ Adoption
◦ Diffusion
◦ Managing uncertainty
Voice of the customer
◦ Product Protocol
◦ R&D – Marketing
Interface
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AWARENESS
INTEREST
EVALUATION
(mental rehearsal)
TRIAL
ADOPTION
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



Innovativeness: predisposition to buy new and different products
and brands rather than remain with previous choices and
consumption patterns. (Steenkamp, ter Hofstede and Wedel 1999)
If your target customers score high on “innovativeness”: blessing
or curse?
Innovativeness is in turn determined by personal traits such as:
◦ Conservative (security, conformity, tradition) versus Openness
to Change (‘self-direction’, searching for stimuli)
◦ Ethnocentrism: appropriateness to purchase foreign products
◦ General attitude towards the past
Innovativeness is also determined by cultural traits:
◦ Individualism (+); Uncertainty avoidance (-); Masculinity (+)
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Probability of trial in consumer packaged goods markets
(Steenkamp & Gielens 2003) is a function of:
◦ Innovativeness (+)
◦ Importance of social-normative pressure in society (-)
◦ Recent marketing communication (+)
◦ Brand strength (+)
◦ Intensive strategy regarding the marketing mix (+)
◦ Characteristics of the category (e.g., competitive
reactions, crowding, marketing intensity, intensity of
new product introductions)
◦ Novelty (nature of effect not so clear)
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Perceptions of usage difficulty delay purchase (48% of potential digital
camera buyers) and actual usage difficulty increases product returns
to the shop (30% of home networking products).
Model of the influence of complexity expectations on innovation
evaluation:
Updating expectations
Step 1:
Complexity
expectations
Awareness
Step 2:
(Dis)confirmed
expectations
Step 3:
Experienced
emotions
Early use of innovation (Trial)
Step 4:
Innovation
evaluation
Step 5:
Usage
diffusion
Adoption
(Source: Wood and Moreau 2006)
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
Network externalities
◦ The value of a product to its users increases with the
installed base (number of users)
◦ Three sources (Lee and O’Connor 2003):
Direct effects—the relationship of the product to its
customer base (e.g., fax machine)
Indirect effects—the relationship of product compatibility
to product utility (e.g., operation system and application
software)
The standards issue (battle of competing standards, e.g.
VHS vs. Betamax)
◦ Network effects lead to lock-in and “winner-take-all”
competition
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◦ Consumers derive intrinsic value from features/attributes
and extrinsic value from installed base and availability of
complementary products
Illustration: positive feedback loop indicating indirect
network effects in the PC industry:
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



Express T as the ultimate long-run trial rate (in %)
Express R as the ultimate long-run repeat rate (share of
purchases among those who tried the product)
Use prior information on repeat rates, switching rates,
etcetera to value the components of this model
Use what-if analysis to examine the sensitivity of the
market share forecasts
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Adoption %
100
Laggards (16%)
Late majority (34%)
Early majority (34%)
Early adopters (13.5%)
0
Innovators (2.5%)
Time
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 Roger’s classification of adopters:
Innovators Entrepreneurial, open to new ideas, higher income
Early
adopters
Opinion leaders, link to early majority, social
networks
Early
Majority
Less leadership, more risk-averse, social networks
Late
majority
Often economic/social pressure to adopt, less
embedded in social networks
Laggards
Not open to change, often adoption after new
versions or substitute products are already entering
the market
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(Source: Tellis, Stremersch and Yin 2003)
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
Moore’s chasm model for
discontinuous high-tech innovations
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Cumulative # adopters
Market potential
dY (t )
 g (t )[ M  Y (t )]
dt
Diffusion speed at
time t
Adoption rate
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In diffusion model g(t) can take on different forms:

g(t) = p: the innovation coefficient (sometimes called initial

g(t) = qY(t): late adopters learn from early adopters. q is

g(t) = p + qY(t): adoption rate is function of both

Bass model: g(t) = p + (q/M) Y(t)
trial probability).
called the imitation coefficient.
consumers’ innovativeness and imitation.
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Yt
S t  p( M  Yt )  q( )( M  Yt )
M








St = sales at time t
p = innovation coefficient, initial trial
q = imitation coefficient,
M = total market potential
Yt= cumulative sales up to time t
M is a constant, considered to be “known”
Unknown parameters to be estimated, on basis of previous
experiences if the product has not been launched yet: p & q
The Bass diffusion model has great predictive power
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
Marketing mix instruments are ignored

Network effects are ignored

Valid only for first purchase

Subsequent product generations are ignored

Population is assumed homogeneous. But population of
potential adopters can be heterogeneous with some adopters
being driven more by their intrinsic innovativeness and other
adopters being driven more by imitation
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Heterogeneity among adopters: influencers vs. imitators
(Van den Bulte and Joshi 2007)
Some customers are more in touch with new developments and
some (often same) have disproportionate influence on others.
If a proportion θ of the population consists of influentials
(denoted with subscript 1) and the other 1- θ are imitators
(denoted by subscript 2), one needs to account for
heterogeneity in adoption rates:
g1(t) = p1 + q1Y1(t)
g2(t) = p2 + q2[wY1(t) + (1-w)Y2(t)]
(the influentials)
(the imitators)
 Note the asymmetry! Also note: q1 and p2 need not be zero.
 If p2 = 0, contagion from influencers to imitators is critical!
 If p2 = 0 and also w is small, then the diffusion process is
“bimodal”, i.e. the “chasm” pattern (see next sheet).
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Application of this extension to the Bass diffusion model:
If: p1=0.01; p2=0; q1=0.5; q2=0.2; θ=0.15; w=0.01
Then: diffusion process becomes bimodal, with “chasm”
Adoptions
0.04
0.02
Time
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(1) Use the Life Cycle concept of financial analysis
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(2) Adopt real-options analysis in new product value
assessment: taking an option on a new product opportunity
Data (see Figure 11.7):
 Startup costs in Year 0: $70,000.

The cash flows for Years 1 through 4 are estimated to be
$40,000 in a high-demand scenario, or $10,000 in a lowdemand scenario.

The probabilities of a high- or low-demand scenario are both 50
percent.

The product concept could be abandoned after Year 1, and the
equipment could be sold for $38,000.

Discount rate = 12%.
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Cash flow in Year 1 for each demand scenario:
Demand
Year 1
Year 2
Year 3
Year 4
Total
High
40,000
10,000
40,000/(1.12)2 =
31,888
10,000/(1.12)2 =
7,972
40,000/(1.12)3 =
28,471
10,000/(1.12)3 =
7,118
$136,073
Low
40,000/(1.12)
= 35,714
10,000/(1.12)
= 8,929
$34,018
Low demand scenario: cash flow in Year 1 if option taken to abandon project
and equipment is sold:
Demand
Year 1
Take Option to
Abandon and Sell
Equipment
Total
Low
10,000
38,000
$48,000
Therefore the project would be abandoned after Year 1 in case we
find ourselves in the low demand scenario.
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Now assess NPV for each demand scenario, assuming project
is abandoned after Year 1 if demand is low.
Demand
Year 0
Year 1
Year 2
Year 3
Year 4
Total
High
-70,000
40,000/(1.12)
= 35,714
40,000/(1.12)2
= 31,888
40,000/(1.12)3
= 28,471
40,000/(1.12)4
= 25,421
$51,494
Low
-70,000
48,000/(1.12)
= 42,857
-$27,143
Expected value of investment is:
(0.5)($51,494) + (0.5)(-27,143) = $12,176
Since this expected value is greater than 0, firm should make the investment.
Source: Edward Nelling, "Options and the Analysis of Technology Projects," in V. K.
Narayanan and Gina C. O'Connor (eds.), Encyclopedia of Technology & Innovation
Management, Chichester, UK: John Wiley, 2010, Chapter 8.
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Sometimes referred to as product requirements, product definition,
deliverables  necessary to make smooth transition from “full
screen” toward actual “development”



Product protocol summarizes the output of the NPD process and
specifies the (measurable) deliverables per functional area to the
final product.
It provides direction for integrative action consistent with the full
screen (especially technical people and marketeers)
It helps improve cycle time by reducing inefficiencies since it
forces everyone to think of key deliverables of the new product.
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

Core Benefit Proposition: states the unique benefits that
the product is to provide customers as well as those
benefits required to meet and surpass competition.
CBP can be understood as a description of strategy in
terms of customer benefits.
Example: CBP of American Express Traveler’s Cheques:
accepted everywhere; prompt replacement and
complete protection if lost; prestige.
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Other example: Built NY’s carrier for two wine bottles.
 Key customer benefits:
◦ Protective, insulating, ergonomic, lightweight,
reusable, inexpensive, flexible (easy to fold)


Result: neoprene wine bottle carriers (inexpensive, easy
to cut and dye into designer colors).
Spinoffs included beer carriers and baby-bottle carriers.
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
The protocol should include (keep in mind for assignment):
◦
◦
◦
◦
◦
Target market
Core Benefit Proposition
Positioning versus competition
Product features to fulfill CBP
Initial marketing mix strategies consistent with CBP, marketing
deliverables
◦ Financials
◦ Potholes
◦ Other:
 Augmentation dimensions
 Timing
 Production
 Regulation
See Figure 12.4 for an example for a home trash disposal system
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R&D
engineering
Marketing
Production
Finance
Urban and Hauser 1993
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
Marketing: identifying customer needs;

R&D/engineering: how to satisfy needs;

Evaluating product concepts (full screen) requires interdepartmental communication:
◦ R&D needs insight into customer needs;
◦ Marketing needs insight into technological capabilities
and restrictions;
◦ Both need to realize the consequences for production
and competitive strategy.
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MKTG: We’re going to be needing a solar-powered version of
our standard garage door opener, soon.
R&D: How reliable should it be? Should it be controllable from
inside the house? Should we use new electronics technology?
Should it be separate from the collector system already
installed?
MKTG: Well, you’re the technical people, make some
recommendations.
R&D: In other words, you don’t know what you want.
MKTG: Cripes, do we have to tell you everything? What do you
do for a living? How should we know where the collectors
should be located?
R&D: If we go electronic, you’ll say it’s too expensive. If we go
electric, you’ll say we’re living in the 1930s. Wherever we put
the collectors you will say we are wrong. If we guess, you
second-guess.
MKTG: OK. Put the collectors on the garage roof.
R&D: That probably can’t be done.
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Communication problems due to:
◦ Differences in personality;
◦ Different thought worlds:
 Training and background
 Time horizon
◦ Language
◦ Incentives (e.g. market share versus patents)
◦ Distance
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Factors complicating the marketing/R&D
interface (Arthur D. Little)
Differences in status, carreer and rewards
No identified counter parts in the other functions
Functions located in different buildings
Lack of encouragement by top management
Different organizational structures
Lack of awareness of the need to cooperate
Lack of exposure to each other's jargon
Functions located in different cities
Functions report to different units
Traditional predominance 1 function
Lack of job rotation mktg/R&D
0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
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
Developed at Mitsubishi’s Kobe shipyard;

Quality in terms of ‘satisfying explicit or latent needs’.

Objective: improving new product success by improving communication and
cooperation between departments (marketing, R&D, engineering, production).

E.g.: Communication between marketing and R&D in early phase of NPD process;

Successful: faster design (40%) at lower costs (60%);

“House of Quality” as the first step in Quality Function Deployment.

Combines customer needs and design attributes.
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Example PHILIPS:
-
9
Demanded
weight

Front material
WHAT
9
# of controls
Natural sound
Freq. response
HOW
+
Harm. Distort.
Sound freaks’ needs
for an audio set
6.25
Adjust. freq. band
3
12.5
Easy to operate
9
0
Radiates quality
1
Weighted sum 
3
56.25 56.25 39.5
6
1
1
2
3
Unit of measurement
dB
dB
#
Type
Values for our product
0.7
-40
9
pvc
Values for competitors A / B
0.5/1.2 -60/-60 12/19
pvc/al.
 New target values
0.5
pvc
Ranking 
-60
17
2
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Expansion: perceptions versus reality
-
+
Front material
# of controls
9
Harm. Distort.
Freq. response
Natural sound
9
Customer perceptions
(P = Philips; A & B =
competitors)
A
6.25
Adjust. freq. band
3
12.5
Easy to operate
9
0
Radiates quality
1
3
2
P
P A
B
B
P A
B
A
B
P
Further expansions: degree of technical difficulty; costs; …
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

Often expanded to series of consecutive houses:
Design requirements (horizontal) versus
component characteristics (vertical);
Component characteristics (horizontal) versus
process requirements (vertical);
Process requirements (horizontal) versus
production planning requirements (vertical).
Hence, with QFD the voice of the customer pervades the
entire process from design to actual production.
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Griffin and Hauser 1992



QFD leads to more communication within and between
functions;
Reduces communication between team and higher layers
in organizational hierarchy;
QFD reduces communication outside the boundaries of a
team
◦ More efficient or myopia?
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